50 Institutions and Economic Growth: A Historical Introduction
high measurement costs, even with third party enforcement, pose problems with
respect to opportunism, cheating, etc.
But why isn’t it automatic to develop more and more complex institutions that
will enable us to handle more complex interdependence? Indeed, much of the
literature of game theory and stories of institutional development imply that the
progress of primitive societies to the status of modern Western societies should
be automatic and unilinear. The answer is quite clear. The breakdown of personal
exchange is not just the breakdown of a dense communication network, but is the
breakdown of communities of common ideologies and of a common set of rules
in which all believe. The rise of impersonal rules and contracts means the rise of
the state, and with it unequal distribution of coercive power. This provides the
opportunity for individuals with superior coercive power to enforce the rules to
their advantage, regardless of their effects on efficiency. That is, rules will be
devised and enforced on behalf of the interests of the politically advantaged but
they will not necessarily lower the costs of transacting in total.
In fact, one of the most evident lessons from history is that political systems
have an inherent tendency to produce inefficient property rights which result
in stagnation or decline. There are two basic reasons for this result. First, the
revenue that can be raised by rulers may be greater with an inefficient structure
of property rights that can, however, be effectively monitored, and therefore
taxed, than with an efficient structure of property rights with high monitoring
and collection costs. Second, rulers can seldom afford efficient property rights,
since such rights can offend many of their constituents and hence jeopardize
the security of others’ rights. That is, even when rulers wish to promulgate
rules on the basis of their efficiency consequences, survival will dictate a
different course of action, because efficient rules can offend powerful interest
groups in the polity.
- THE NATURE OF INSTITUTIONS
Institutions are rules, enforcement characteristics of rules, and norms of behavior
that structure repeated human interaction. Hence, they limit and define the choice
set of neoclassical theory. We are interested not in the institutions per se, but in
their consequences for the choices individuals actually make.
Constitutions, statute and common laws, and contracts specify in formal terms
the rules of the game, from the most general constitutional ones, to the specific
terms of a particular exchange. Rules (and their enforcement) are constrained by
the costliness of measuring the characteristics or attributes of what constitutes
rule compliance or violation. Hence, the technology of measurement of all the
dimensions (sight, sound, taste, etc.) of the human senses has played a critical
role in our ability to define property rights and other types of rules. Moreover,
since we receive utility from the various attributes of goods and services rather
than from the entities themselves, it is the costliness of measuring the separable
dimensions that is critical in this study. The relationship between the benefits
derived from rule specification and the costs of measurement not only has been